Deal for Greek Aid Leaves Questions Unanswered

WHILE finance ministers from the euro zone and the International Monetary Fund bridged their main differences over a bailout for Greece early Tuesday, bringing closer the release of long-delayed emergency aid, what they left undecided means this long-running drama — and the cohesion of the euro union — is far from settled.

The deal allows Greece to avoid an imminent default on its debts and diminishes the prospect of a Greek exit from the euro union. But analysts said Greece could still be forced to drop the euro, largely because the agreement does little to revive the country’s stricken economy or wean its government from the need for outside financial aid.

Markets reacted positively to the deal on Tuesday. But analysts said the outcome of three stormy late-night meetings in the last three weeks was a weak compromise.

Even Christine Lagarde, the managing director of the I.M.F., appeared hesitant about the deal during a news conference early Tuesday.

“How solid is it?” Ms. Lagarde said. She questioned whether the ambitious debt-reduction goals set for Greece in the next eight years could be enforced. But she insisted that she was satisfied with the outcome and that those goals could be met.

She warned Greece’s creditors that they needed to ease repayment terms immediately and offer more relief once the country hit budget targets that can put it on a path to manageable debt by the end of the decade. But she did not explain what that additional relief would entail.

And she said the I.M.F. would not approve the next disbursement of aid to Greece until a major plank of the agreement was satisfied: more loans for Greece to enable it to buy back its debt at a discount.

The measures decided early Tuesday include longer maturities and lower interest rates for Greece’s bailout loans. And central banks in countries that use the euro agreed to return to Greece any profits made on Greek bonds purchased by the European Central Bank.

The program still needs approval by some national parliaments in the euro area, including Germany’s, where the prospect of sending new bailout money to Greece is seen as politically untenable, at least until after German elections next year.

Lawmakers in Berlin have begun debating the agreement on Greece. The German finance minister, Wolfgang Schäuble, indicated that he hoped approval could be obtained by the end of the week.

At best, the deal bought time for Germany and other chief creditors before they might need to accept outright write-downs, or haircuts, on Greece’s debts, according to analysts.

Using guarded language, Mr. Schäuble said early Tuesday that once Greece had “fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt.”

Photo

A kiosk in Athens. European finance ministers reached an agreement Tuesday on a bailout needed by the Greek government.Credit
Simela Pantzartzi/European Pressphoto Agency

Fabio Fois, an economist at Barclays, wrote in a briefing note on Tuesday that “an outright haircut on E.U. loans of at least 20 percent” would still be needed. He also suggested that “the positive response of the market might prove short-lived.”

There will almost certainly be sparring over Greece for years to come, particularly because the Germans, backed by the Dutch and the Finns, remain wary of forgiving Greece’s debt.

Among main concerns on Tuesday was the lack of clarity about the buyback plan. Analysts said they expected euro area states to lend Greece money to buy back its own bonds from private investors at discounted prices. But there were questions about the plan, including when it would take place and whether bondholders would accept the terms.

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To complete the buyback, the Greek government would have to borrow about 10 billion euros, or $13 billion.

Until those details are resolved, Greece is not supposed to receive the next installment of bailout money — about 34.4 billion euros — that has already been long delayed.

In Athens, Prime Minister Antonis Samaras on Tuesday hailed the agreement as the start of “a new day for all Greeks,” but his coalition partner, Evangelos Venizelos, the Socialist leader, hinted at concerns. The accord was “undoubtedly positive,” but there were “things to note in the details,” Mr. Venizelos said.

Despite the unresolved issues, analysts expected the emergency aid to be paid to Greece in mid-December, with further payments in the first quarter of next year as long as Greece continues to fulfill its pledges under the bailout plan.

The aid has been called vital for preventing Greece from defaulting on its loans.

The delay means that the Greek government’s unpaid bills, which stood at 8.3 billion euros at the end of September for goods like medicines and services like construction, “will continue to grow for at least a couple of weeks,” said Janet Henry, the chief European economist at HSBC.

Some analysts predicted problems arising from the I.M.F.’s continued insistence on ambitious debt-reduction goals. The new target is a reduction of debt to 124 percent of gross domestic product by 2020, from 175 percent now.

Zsolt Darvas, a fellow at Bruegel, a research organization, said reaching that goal would require “perfect implementation.”

“A lot of luck will be needed, including a rebound in growth,” he added. Otherwise, he said, Greece’s financial problems would continue and “the social pressure on the government and the parliament could increase.”

The coalition government could eventually collapse, “leading to a euro exit with disastrous consequences inside and outside Greece,” Mr. Darvas said.

Greece’s economy was contracting at a 6.4 percent annual pace and was expected to continue to stagnate next year. Promises to cut an additional 9 billion euros out of the economy could further aggravate an increasingly agitated society weary of austerity and undermine the fragile coalition government.

Contributing reporting were Liz Alderman from Paris, Melissa Eddy from Berlin and Niki Kitsantonis from Athens.

A version of this news analysis appears in print on November 28, 2012, on Page B3 of the New York edition with the headline: Breakthrough Deal for Emergency Greek Aid Leaves Questions Unanswered. Order Reprints|Today's Paper|Subscribe